CME's Melamed takes on CFTC's Chilton, defends speed traders

CME Group Inc (CME.O: Quote, Profile, Research, Stock Buzz) Chairman Emeritus Leo Melamed came to the defense of high-frequency trading on Monday, saying the rapid-fire style of buying and selling provides an important service.

About 40 percent of trading at CME, the biggest U.S. operator of futures markets, comes from high-frequency traders, Melamed said in introductory remarks to a panel discussion [at the CME Group-MSRI Prize event] on banking regulation at CME's headquarters in Chicago.

The computer-aided trading style, blamed for causing a sudden rise in oil prices on the CME-owned New York Mercantile Exchange in February, among other market events, has come under recent fire. One futures industry regulator suggested publicly last week that such trading may need to be reined in.

"This is an attack," Melamed told an audience of about 100 economists, traders and others. "Everywhere I read, there is anti-anything that represents an advancement in technology, in innovation, that's based on mathematics. Particularly pertinent is this attack on high-frequency trading."

Writing in the Financial Times on Sept. 6, Bart Chilton, of the five-member U.S. Commodity Futures Trading Commission, argued for developing rules to regulate high-frequency trading.

"There is a good argument to be made that 'parasitical trading' does not truly contribute to fundamental market functions," Chilton wrote in the column. "While I am not saying all high-frequency trading is bad for markets, I think there is a great possibility that some of it is."

Melamed took issue with Chilton's view, saying high frequency traders contribute to markets by putting out real bids and offers, and take true risk in doing so.

"The liquidity they create is not fictitious," he said.

Melamed is on the advisory board of the trading firm, whose computer-trading program caused the oil-price spike in February. [ID:nN25119290] (Additional reporting by Jonathan Spicer in New York) (Reporting by Ann Saphir in Chicago; Editing by Dan Grebler)